Ever-extending regulation

In the rush to regulate –  that seems to characterise all our governments these days – it was announced yesterday that government plans to legislate to give the force of statute law (complete with penalties) to “do not knock” signs on someone’s front door.       What next?  Statutory penalties for, say, people who dawdle down Lambton Quay at lunchtime trying to text as they walk, or any of the many other minor social irritants?

But the initiative that particularly caught my eye was a proposal to legislate to fix the maximum cost of “high cost” credit at no more than 100 per cent of the value of the loan.  Borrow $500 and the total interest and fees you will ever pay will be capped at $500.   Apparently (judging from the high level material the minister published) regardless of how long the term of the loan is.  That seems more than a little incoherent, even granted the inevitable good intentions of the minister and his officials.

When I first bought a house, floating first mortgage interest rates were (according to the RB website) 15.5 per cent.   Admittedly, there was still a fair amount of inflation in the system at that stage.  But when I bought my current house in 1995, the inflation target was 1 per cent and the average floating first mortgage interest rate was 10.64 per cent.   On a 25 year table mortgage (from memory what was typical term back then), at that interest rate a mortgage calculator tells me that I’d have paid $373000 in interest alone on a $200000 mortgage over the life of the loan.    Mortgage rates of 10.64 per cent probably seem quite foreign and implausible today, but if it happened before –  with an inflation target lower than today’s –  it can happen again.  In fact, ANZ’s Visa interest rate –  over which they have full security of your home if you happen to have a mortgage with the same bank –  is currently 20.95 per cent.   If it took you eight years to steadily pay off a debt at that interest rate you’d also have paid more than 100 per cent of the initial loan in interest.

As I understand it, the government’s proposal won’t apply to mortgages –  even though the lender has much better security than is typical for one of the target loans.  Perhaps it won’t even apply to credit cards, although if so the logic of any such distinction escapes me.

I’m not unsympathetic to the concerns that probably motivate these reforms. I come from a tradition that for centuries (even millennia) looked askance –  as I still do –  on charging any interest rate to those in need.

Exodus 22:25       “If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.

I hugely admire the work of people like the Kingdom Resources Trust (among its services are some interest-free loans).

But it is hard to see how the government’s proposed cap, imposed quite without regard to how long the loan is outstanding for, is either just or efficient.

There looks to be quite a bit of discussion in the Regulatory Impact Statement of the possibility that some restrictions would severely reduce the availability of credit (they cite one particular UK intervention which it is estimated to have reduced the number of people using “high cost” credit by 40 per cent over 18 months).  And yet, absent any robust analysis suggesting that lenders in these sectors are making consistent excess risk-adjusted profits, it is hard to see how the effect of any binding restrictions is not going to be to restrict access to credit.   And restricting by total interest cost –  regardless of the term of the loan –  seems to have little going for it.  The impact on a two-day payday loan (which the document seems concerned to protect) will be less severe than that on someone who might –  rationally – need a loan for a year to cover a new fridge or a new set of tires for the car, or even the expenses of some culturally significant festival.

The government’s proposals (summarised here) aren’t just about capping the total interest expense, but about adding numerous layers of other regulation, including yet further extension of “fit and proper person” tests in which bureaucrats get to decide, subjectively, who is a suitable person to run a business.

To repeat, I’m not suggesting there are no issues here, or that some individuals don’t find themselves in exploited situations.   And yet, for example, we know that housing costs are one of the major contributors to financial pressure on lower income households, and after a year in office the government has done absolutely nothing substantive to fix the rort that governments themselves impose/facilitate, that render urban land so outrageously unaffordable to large portions of our people.  And there is no strategy to lift productivity growth, the only sustainable basis for higher incomes.    Imposing ever more regulations –  that will bear heavily on small entities and probably won’t much bother the large operators – is a headline-grabbing response, but it does little about the underlying problem.

It is also hard not to conclude that the ever more pervasive net of regulation is partly a reaction to the decline of the numerous intermediate institutions of society –  trade unions, extended families, friendly societies, churches, lodges etc –  which once helped people get through tough times, and helped vulnerable people cope with life generally, without the ever-expanding panoply of intrusive, inflexible, and costly government regulation.